In every business, management and entrepreneurs are concerned with stock valuation for various reasons such as prediction of market prices in the future, potential current prices that may necessitate profits or when determining share value of the company. Several methods are available for stock valuation and are chosen depending on the type of the company or stock valued. In my experience in manufacturing company, I encountered earning per share, (EPS) growth versus estimated price or earnings, (PE) ratio approach for stock valuation.
In this method, the future earnings per share were projected to a given point. The projection was done by determining the growth rate of EPS in each year and the growth rate that was obtained from the past years was used to estimate future stock price (Quiry, & Vernimmen, 2011). When the price of stock was obtained, the company’s current estimated growth rate was fed in the compound interest formula to obtain the current value of share, which was referred to as intrinsic value.
The value was the tagged in the stock market as the current price of the company’s share.
From my stock valuation experience, I found that it is possible to improve the corporate facet by introducing the same stock valuation approach to local market where such knowledge is not available despite constant transaction that require stock valuation such as buying and selling businesses. This is because current value of stock can be determined the predicted based on growth rate. The total value is determined using other tangible goods in case of sales. The stock valuation method is applicable in the current market where there is constant selling and buying out of businesses. When the owners are able to estimate the stock value at the time of sale, there will low probability of undervaluing or overvaluing the business. Therefore, the introduction of the method to the medium entrepreneurs and businesspersons in the local economy will decrease the exploitation of people who lack corporate finance knowledge.
Quiry, P., & Vernimmen, P. (2011). Corporate finance: Theory and practice. Chicester, West Sussex, U.K: Wiley.